Summary of the First Engrossment of H.F. 780 (Wardlow)

The first engrossment of H.F. 780 (Wardlow), as recommended by the House Education Finance Committee, amends Minnesota Statutes, Section 122A.46, Subdivision 9, which governs the insurance benefits that a teacher on an extended leave of absence may qualify to receive, and Minnesota Statutes, Section 354.094, Subdivision 1, which governs the payment of retirement contributions by or on behalf of a teacher on an extended leave of absence, by making the following changes:

1. Medical Insurance Premium Reimbursement Preceding District Payment. The timing of the reimbursement by a teacher on an extended leave of the school district’s payment of medical or other insurance premiums is shifted from one month following the school district payment to one month preceding the school district payment;

2. Collective Bargaining Agreement for District Payment of Extended Leave of Absence Premiums. School districts would be permitted to enter into a collective bargaining agreement for the district payment of all or a portion of extended leave of absence teacher medical or other insurance premiums, rather than requiring payment by the teacher;

3. Collective Bargaining Agreement for District Payment of Extended Leave of Absence Employer Retirement Contributions. School districts would be permitted to enter into a collective bargaining agreement for the previously permitted district payment of all or a portion of Teachers Retirement Association (TRA) employer contributions; and

4. Collective Bargaining Modifications Effective for Current or Future Bargaining Agreements. The proposed changes are effective on the day following final enactment and apply retroactively to current collective bargaining agreements as well as future collective bargaining agreements.

S.F. 664 (Tomassoni) amends Minnesota Statutes, Section 122A.46, Subdivision 9, which governs the insurance benefits that a teacher on an extended leave of absence may qualify to receive, and Minnesota Statutes, Section 354.094, Subdivision 1, which governs the payment of retirement contributions by or on behalf of a teacher on an extended leave of absence, by making the following changes:

1. Collective Bargaining Agreement for District Payment of Extended Leave of Absence Premiums. School districts would be permitted to enter into a collective bargaining agreement for the district payment of all or a portion of extended leave of absence teacher medical or other insurance premiums, rather than requiring payment by the teacher;

2. Collective Bargaining Agreement for District Payment of Extended Leave of Absence Member Retirement Contributions. School districts would be permitted to enter into a collective bargaining agreement for the previously permitted district payment of all or a portion of Teachers Retirement Association (TRA) member contributions; and

3. Effective for Future Agreements after August 1, 2003. The proposed changes are effective on August 1, 2003, and apply only to future collective bargaining agreements.

Amendment A03-0414, forwarded to the Legislative Commission on Pensions and Retirement by the staff of the House Education Finance Committee, would modify the first engrossment of H.F. 780 (Wardlow), as follows:

1. Mandatory Sunset of Extended Leave of Absence Collective Bargaining Agreement Provisions. The collective bargaining provisions related to extended leave of absence teachers authorized by the proposed legislation must be subject to a sunset, although no maximum sunset date is specified, and may not be a continuing part of the collective bargaining agreement; and

2. Collective Bargaining Agreement for District Payment of Extended Leave of Absence Member Retirement Contributions. School districts would be permitted to enter into a collective bargaining agreement for the previously permitted district payment of all or a portion of Teachers Retirement Association (TRA) member contributions.

Minnesota’s public defined benefit plans are a personnel policy tool of the employer in that they serve to attract sufficient numbers of new employees, to promote retention of capable existing employees, and to out-transition long-term employees at the end of their fully productive working life, by providing those long-term employees with retirement plan income which is sufficient, in conjunction with personnel savings and social security, to allow the individual to retire without a significant drop in the standard of living.

Leave of absence provisions are found in most Minnesota defined benefit public pension plans. They permit the individual to receive either full or partial service credit for a period of break in service to the employer. The provisions are somewhat unusual in that they are providing service credit in the retirement plan for a period of time during which the individual was not providing service to the employer. The provisions presumably are justified in that they serve as retention tools. Another factor may be that the leave, if used to receive additional training or education, further enhances the productivity and value of the employee to the employer.

Some plans have few leave of absence provisions. The General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), for example, has a military leave of absence provision, and a generalized leave of absence provision it utilizes for other forms of leave. Teacher plans tend to have several leave of absence provisions, each tailored to a specific leave type. The Teachers Retirement Association (TRA) has a sabbatical leave provision (Section 354.092), paternity/maternity leave (Section 354.093), extended leave of absence (Section 354.094), medical leave (Section 354.095), family leave (Section 354.096), and military leave (Section 354.53). The first class city teacher plans have similar leave types, and there are some additional leave types which apply only to Minneapolis Teachers Retirement Fund Association (MTRFA) or St. Paul Teacher Retirement Fund Association (SPTRFA) basic members. Basic member leave provisions in the St. Paul and Minneapolis plans are found in their bylaws rather than in statute.

Generally, the employee, the employer, or both, are required to make contributions to the pension fund if the individual is to receive service credit for a leave period. The general intention is to approximate, as closely as feasible, the treatment that would have occurred if the employee had not been on leave. If the individual had worked during the period, employee and employer contributions would have been deducted from pay. Some allowance is typically provided in law in recognition that the employee may have a reduced compensation during the leave or possibly no compensation at all. Because of this, it is not uncommon to allow all or a portion of required or optional employee contributions to be made by some date a year or more following the end of the leave. If employee contributions are made, the employer is then notified of the contributions and the employer is mandated to make corresponding employer contributions.

There is a lack of consistency within plans or across similar plans regarding leave payment requirements. Contribution requirements often differ, and there are often differences in salary bases used to compute any required contribution amounts, the time limits for making contributions, and interest payment requirements when payments are not received until well after the leave occurs. This lack of consistency creates unequal treatment of similar individuals, raising equity issues for the individuals and subsidy effects among employees and contributing employers.

The Teachers Retirement Association (TRA) has had longstanding problems administering its various leave of absence provisions, including problems identifying, in a timely manner, members who are on leave, ensuring that members are notified of leave contribution requirements; and enforcing statutory payment deadlines and interest requirements. At times, individuals have been permitted to make contributions to receive service credit in TRA although the window for making contributions stated in statutes had expired. In the last few years, TRA has requested expanded authority to receive more timely information from school districts on required contributions and the leave or work status of all active TRA members. If this information is effectively used by TRA, the occurrence of new problems should decrease significantly. However, there are teachers currently in the system who have past problems with leave notification or payments that may take years or decades to identify and resolve.

The following compares the provisions of the general statewide and major local retirement defined benefit plans with respect to crediting allowable service for extended leaves of absence:

Between the first engrossment of H.F. 780 (Wardlow), S.F. 664 (Tomassoni), and Amendment A03-0414, seven changes are proposed for the Teachers Retirement Association (TRA) extended leave of absence provision.

1. Extended Leave of Absence Medical Insurance Reimbursement Timing. The teacher reimbursement of insurance premium payments is shifted from after-the-payment to before-the-payment (H.F. 780 (Wardlow), first engrossment, Section 1);

2. School District Payment of Extended Leave of Absence Medical Insurance Premiums. School districts would be permitted to pay all or a portion of medical and related insurance premiums for teachers on extended leaves of absence (H.F. 780 (Wardlow), first engrossment, Section 1; and S.F. 664 (Tomassoni), Section 1);

3. Collective Bargaining Rather Than Individual Agreement on Extended Leave of Absence Medical Insurance Premium Employer Payments. The arrangement of employer-paid medical and related insurance premiums would be done collectively rather than individually (H.F. 780 (Wardlow), first engrossment, Section 1; and S.F. 664 (Tomassoni), Section 1);

4. School District Payment of Extended Leave of Absence TRA Member Contributions. School districts would be permitted to pay the member contributions to TRA for teachers on extended leave of absence (S.F. 664 (Tomassoni), Section 2; and Amendment A03-0414);

5. Collective Bargaining Rather Than Individual Agreement on Extended Leave of Absence Member and Employer TRA Contributions. The arrangement of the employer payment of both member and employer contributions to TRA for teachers on extended leaves of absence would be done collectively rather than individually (all three proposals, in whole or in part);

6. Automatic Sunset of Employer Insurance Premium and TRA Member and Employer Contributions Extended Leave of Absence Collective Bargaining Agreements. Collective bargaining agreements relating to the extended leave of absence program are required to automatically sunset without automatic continuation (Amendment A03-0414); and

7. Immediate Effect and Retroactive Application. The authority would be effective immediately and would apply to current collective bargaining agreements as well as future agreements (H.F. 780 (Wardlow), first engrossment, Sections 1 and 2).

The proposed legislation, in its variations, raise several pension and related public policy issues that may merit Commission consideration and discussion, as follows:

1. Appropriateness of the Continued Existence of the TRA Extended Leave of Absence Provision. The policy issue is the appropriateness of the continued existence of the TRA extended leave of absence provision. The extended leave of absence provision, Minnesota Statutes, Section 354.094, was enacted in 1977 (Laws 1977, Chapter 447, Article 9, Section 3), as an initiative by former House Speaker, Representative Martin O. Sabo, and was intended to assist in an early out-transitioning from teacher by more senior teachers to reduce the glut of highly compensated teachers that then existed. Despite the fact that the 1977 problem was presumably temporary, the provision was not sunsetted and remains as a permanent provision of TRA law. The program also was premised on a doubtful assumption that there are large numbers of senior teachers in TRA who are so entrepreneurial or who are so potentially employment mobile that they would shift careers if only their retirement coverage was augmented by an additional five years of service credit. The program was not supported by TRA at the time and has caused administrative problems over the succeeding years, necessitating much of the 19 subsequent amendments to the program. The Commission may wish to take additional testimony about the number of teachers that have taken extended leaves of absence, the number of teachers who returned to teaching after the extended leave, the average age, length of service, and salary of teachers granted extended leaves of absence, and pension plan, employee, and employer perspectives on the program. If the program has outlived its purpose or has not been effective in solving the problem it was designed to solve, the statute should be repealed rather than amended.

2. Extended Leave of Absence Program is an Uncertain Early Retirement Program. The policy issue is the appropriateness of using the extended leave of absence program as an early retirement program. The program was intended, in 1977, to induce teachers to give consideration to a career change by eliminating retirement plan disincentives to leave teaching. A teacher cannot go on an extended leave of absence and also receive retirement benefits during the period or also be employed as a public employee or teacher elsewhere in Minnesota during the period. The program only works if the teacher has a viable second career that will replace all or most of the teacher’s prior standard of living. In a time of economic downturn, with limited employment opportunities, taking an extended leave of absence to try other employment does not seem promising, even if retirement is possible at the end of the leave. If the new career lacks health insurance coverage or pension coverage, the second career may well not provide a sufficient income to the teacher on leave and the leave would be ill advised for that reason.

3. Lack of Targeting or Inadequate Targeting for the Amended Program. The policy issue is the appropriateness of the lack of targeting of the proposed extended leave of absence program revisions. Employer-paid medical insurance coverage is a frequent component of early retirement incentives and these changes appear to be a likely attempt to convert a leave program into an early retirement program. The Attorney General’s opinion of March 29, 2002, apparently arose in the context of the teachers organization in Independent School District No. 279 (Mendota Heights) proposing inclusion of the employer-paid health coverage and employer-paid TRA member contribution provisions to its overall contract with the school district, as a general benefit without any targeting. If the provision is to be a beneficial early retirement or early out-transitioning program, the provision must be targeted to gain actual net salary savings and to not adversely affect teacher staffing. If not targeted, nothing would prohibit a school district’s senior mathematics, science, and special education teachers from leaving, requiring the district to have to recruit qualified teachers from other school districts at a compensation premium or requiring the district to utilize less qualified teaching staff. Even if the provision was amended to restrict the revisions to pre-July 1, 1989, teachers, the amended program would not address the potential for the program to adversely affect the quality of the teaching staff or to actually add to personnel costs rather than to produce salary savings.

4. Appropriateness of Substituting the Collective Bargaining Process for the Individual Agreement Procedure in Negotiating Extended Leaves of Absence. The policy issue is the appropriateness of eliminating the current practice of fashioning individual arrangements in processing extended leave of absence requests and making the payments of insurance benefit coverage, TRA employer contribution payments, and TRA member contribution payments part of the generalized collective bargaining process and governed by periodic collective bargaining agreements. If it is appropriate to convert a leave program to an early retirement incentive program, the shift from individual agreements to the less flexible collective bargaining process will make the early retirement incentive more akin to an employee entitlement rather than a targetable management tool. Past early retirement incentives framed as an employee benefit entitlement, such as the 1986 temporary "Rule of 85" early retirement provision or the 1993 early retirement temporary formula increase, were determined by the Department of Finance and by the Office of the Legislative Auditor to be ineffective in producing budget savings and likely to produce benefit windfalls for many incentive takers.

5. Appropriateness of Encouraging Teacher Turnover in Light of Reported Teacher Shortages. The policy issue is the appropriateness of expanding any program that will likely make reported teacher shortages worse. There are shortages of teachers in Minnesota reported currently in certain subject areas, such as mathematics, physical science, special education, bilingual education, and business education (see the North Central Regional Education Laboratory website http://www.ncrel.org/ policy/pubs/html/short/shortage.htm). Additionally, the Department of Children, Families and Learning, in 2001, estimated that 24,000 of the state’s 55,000 teachers would need to be replaced by 2004. Without combining it with a proposal for recruiting new teachers to the field, especially in threatened subject areas, would appear to be misguided or irresponsible.

6. Lack of Apparent Employer Interest in Extended Leave Expansion. The policy issue is the appropriateness of revising the TRA extended leave of absence program when there does not appear to be significant employer interest in the revisions. The Commission would be well advised to take public testimony from teacher representatives, school districts, and the Department of Children, Families and Learning on the level of their interest in expanding the program and the benefits that they believe they will obtain from the revisions. Early retirement incentives and teacher turnover inducements, whichever this would be, are inherently management tools to be used to better tailor the current workforce. If school districts are not seeking this tool, the Legislature should be careful in compelling school districts to add it.

7. School District Cost. The policy issue is the level of cost to be borne by school districts in extending the full employer-paid health coverage to teachers on extended leave and in having school districts pay the TRA member contributions for teachers on extended leaves of absence. In fiscal year 2002, for example, Independent School District No. 623 (Roseville) paid $4,042 on average for its 156 former employees receiving post-employment health care benefits. For fiscal year 2003, for example, the member contributions for an Independent School District No. 623 (Roseville) teacher with 21 years of service ranged from $2,784 (BA15) to $3,472 (PhD). If these amounts bear any resemblance to statewide averages, school districts could bear a cost of approximately $7,000 for each teacher on extended leave of absence under the proposed revisions. The question is whether this level of expenditure by school districts is affordable or is beneficial.

8. Lack of Application of the Revisions to the First Class City Teacher Retirement Fund Associations. The policy issue is the appropriateness of making the proposed revisions for the TRA extended leave of absence provisions and not making the similar revisions for the three first class city teacher retirement fund associations extended leave of absence provisions. The three first class city school districts have serious financial problems and the Minneapolis Teachers Retirement Fund Association (MTRFA) and the St. Paul Teachers Retirement Fund Association (SPTRFA) are among the most financially troubled public retirement plans in the state. Not extending the revisions to teachers who currently have comparable extended leave of absence provisions does not further the Commission’s general policy goal of uniformity, but financial considerations may dictate its limitation to TRA.

9. Appropriateness of Making Extended Leave of Absence Program Changes Retroactively Applicable to Current Collective Bargaining Agreements. The policy issue is the appropriateness of validating school district extended leave of absence practices found to be illegal in a March 2002 Attorney General’s opinion by extending the proposed changes retroactively to collective bargaining agreements that are currently in force. If the requested practices are clearly sound pension, personnel, and compensation policies and are broadly supported by school districts, then early implementation of the changes should not be problematic. If the practices found inappropriate by the Attorney General’s opinion represent practices out of the mainstream and potentially ill considered when assembled, then retroactivity should be questioned.

10. Precedent. The policy issue is the existence of any precedent for the proposed revisions and the potential for the proposed revisions to become a precedent for other inappropriate changes. There is a precedent for school districts paying health insurance premium costs for former employees, but these are for retirees and not for employees on leave. The extension of employer-paid health insurance coverage to teachers on extended leave may set a precedent for its extension to other leave recipients, although this issue is not purely a public pension issue. There is no precedent in Minnesota for the employer paying the member’s retirement contributions, although it is apparently a bargainable item for Wisconsin public employees. Allowing an employer payment of member retirement plan contributions for teachers on leave will be argued by active teachers as a strong precedent for similar treatment on their behalf. The Minnesota public pension plan practice of requiring member contributions and the Commission’s policy of having members pay roughly one-half of the normal cost and expenses of a retirement plan serve as a valuable constraint on demands for additional benefit increases. This constraint would be lost if a precedent for employer payment of member contributions is set.